Rules E.45 through to E.52 of the Premier League Handbook control the degree to which football clubs can operate at a loss. Commonly referred to as FFP their correct title is profitability and sustainability rules. Despite the idea presented by some that financial regulation in football is on the wain, the rules are plain to see and the Premier League will continue to monitor, enforce, adjudicate and punish as necessary any breaches of those rules. If anyone had alternative thoughts, then the news that the Premier League and Manchester City continue to be involved in a lengthy legal dispute arising from their UEFA FFP case should provide evidence to the contrary.
So what exactly do the rules say?
Each member club of the Premier League have, in usual circumstances, to submit by March 1st in each season a set of accounts for the current season and the accounts for the previous two seasons. The accounts for the current season must:
” be based on the latest information available to the club and be, to the best of the club’s knowledge and belief, an accurate estimate as at the time of preparation of future financial performance”
From these three sets of accounts the Premier League creates a “PSR calculation” which is the aggregate of the adjusted earnings before tax for the current season (T) and previous seasons (T-1) and (T-2). I will explain adjusted earnings below.
Due to the impact of Covid on football finances, the current rules are slightly different. For this season (2021/22) the Premier League will look at the “PSR Calculation” from the adjusted earnings from the current season (T), the mean (average) of T-1 and T-2 (the two seasons impacted by Covid) and the previous year (T-3).
Similarly for last season there was an averaging for the two Covid related seasons.
So, what are adjusted earnings before tax?
In simple terms they’re the profit and loss account with a few exclusions. The exclusions are:
(i) depreciation and/or impairment of tangible fixed assets, amortisation or impairment of goodwill and other intangible assets (but excluding amortisation of the costs of Players’ registrations);
(ii) Women’s Football Expenditure;
(iii) Youth Development Expenditure;
(iv) Community Development Expenditure; and
(v) in respect of Seasons 2019/20 and 2020/21 only, COVID-19 Costs
What are the limits in terms of PSR calculation?
(i) losses up to £15 million: The Premier League Board will determine whether the club will be able to pay its liabilities (defined in the rules) until the end of the following season (T+1)
(ii) losses in excess of £15 million: The club has to provide financial information which forecasts aggregated adjusted earnings before tax for the following two seasons (T+1, T+2). In addition it has to provide evidence of “secure funding” to a level determined by the Premier League board.
In the absence of “secure funding” the Premier League board can use Rule E.15 as below.
(iii) If the PSR calculation is greater than £105 million: The Premier League board can use its powers within Rule E.15. They include setting a budget that the club must adhere to, provide any information the board requires it to do so, and has the power to prevent new registrations of players (an inward transfer embargo) or new contracts issued to existing players.
Most importantly, the club shall be treated as being in breach of the rules and accordingly referred to a “Commission” which is the means by which the Premier League investigate, adjudicate and punish breaches of the rules. I’ll cover some of the potential remedies later in the article.
So where does Everton sit with regards to profitability and sustainability rules?
Firstly a warning. Our P&S position includes projected figures not yet in the public domain (2020/21 financial results, unlikely to be published before December 2021) and estimates of various costs included in the calculation of adjusted earnings over previous years. With that condition, I have made some estimates to see how close or not we were as at the end of June 2021 to having adjusted losses over £105 million.
The £105 million figure is key here. Below that figure we are within the rules, albeit under scrutiny from the Premier League, but that’s not a problem. Adjusted earnings showing losses greater than £105 million put us in unchartered territories. No club has ever previously breached the profitability and sustainability rules.
Let’s start with the figures we know and that are relevant to these calculations.
Our unadjusted losses for 2019/20 and 2018/19 were £139 million and £111 million respectively. Our unadjusted loss in 2017/18 was £13 million.
To reach to a projected PSR calculation to the end of June 2021 we have to estimate losses for 2020/21 and estimate the adjustments that can be made under the rules outlined above.
Looking at 2020/21 I have forecast revenues of £210 million (including the broadcast revenue from the final games of the 2019/20 season played after 1 July 2020). Wages and operating costs of £210 million. Amortisation, depreciation and interest costs of £126 million. However we have to capitalise the previous costs relating to Bramley-Moore which gives a boost of approximately £40 million to the profit and loss account. That results in a forecast loss of £86 million for 2020/21.
Please bear in mind no adjustments have yet been made as permitted by the Premier League rules.
The aggregate losses for the mean of 2020/21 and 2019/20 plus 2018/19 and 2017/18 before adjustments is estimated at £237 million.
If we estimate women’s, youth and community expenditure at £15 million a year, that gives us an adjustment of £45 million.
Aggregate depreciation of fixed assets estimated at £15 million.
The mean of Covid costs over two years. We know from the 2019/20 accounts the club incurred Covid costs of £67.3 million including £25.9 m of deferred revenue which will appear in the 2020/21 accounts. Matchday revenues in 2020/21 will be approximately £11.3 million lower than 2019/20. Thus I arrive at a mean Covid cost of approximately £37.2 million.
I have made no provision for a further impairment in the value of our intangible assets (the players). For these calculations they would have no impact as they are excluded from the adjusted earnings calculation.
With the caveat that I have made many assumptions and there is bound to be some differences between my forecasts and actual results, I forecast that the aggregate of Everton’s adjusted earnings before tax for profitability and sustainability purposes, up to 30 June 2021 is £140 million.
Please recall that the limit permitted under the profitability and sustainability rules is £105 million.
Whilst I accept there is a considerable margin of error to be applied to my calculations I am not certain they would be sufficient to get the figure to the permitted level.
What else might have happened? It is conceivable that Everton have received much greater commercial revenue than I have anticipated (my model forecast £55 million) but that already includes significant increases based on existing and new commercial partnerships.
Regrettably, based on my own estimates it appears, to me at least, there is a reasonable probability that the club is likely to have breached the profitability and sustainability rules to June 30 2021.
I am aware that the club has good relations with the Premier League and throughout last season was in regular contact regarding our potential losses. Given projections had to be provided before March 1 2021, I am sure that whatever the aggregated position is, it will not be a surprise to the Premier League.
Assuming we are over the £105 million limit what does it mean for the club? We would obviously be at the mercy of the Premier League in terms of their response and potential punishment if found guilty of a breach. We might for example have transfer limits placed upon us or face financial penalties for continued breaches.
Regardless of whether we are under or over the limit, and not withstanding any margin of error in my own forecasts, and I stress they are just forecasts, it is clear to see why the mood around transfer activity has changed. The impulsive, sometimes ill-disciplined behaviour of the past must have been replaced by a new reality.
I am happy of course to correct any errors in my forecasts or in the light of income not yet in the public domain (thereby reducing losses) or any other adjustments should they be brought to my attention.